Residential Capital LLC and its biggest unsecured creditors signed a deal to free the mortgage company’s parent, Ally Financial Inc., from the threat of billions of dollars in bankruptcy-related lawsuits.
Creditors who have agreed to settle include noteholder Paulson & Co., MBIA Insurance Corp. and a group of securitization trusts suing for losses related to bad mortgages written by ResCap, Detroit-based Ally said in a statement.
A ResCap bankruptcy attorney, Gary Lee, told U.S. Bankruptcy Judge Martin Glenn in Manhattan today that the major parties in court-sponsored mediation sessions have a deal that would remove many of the most difficult disputes between unsecured creditors and Ally.
The term sheet that Ally and the ResCap creditors signed must now be expanded into a so-called plan support agreement, in which the parties promise to back a reorganization plan that would split money ResCap has raised to repay as much of its debt as possible.
“I understand you’ve accomplished a great deal to get to where you are now,” Glenn said in court today.
The amount Ally will pay to end current and future lawsuits won’t be made public until next week when court papers to implement the deal are due, Ally said.
ResCap’s 6.5 percent bonds that matured in April rose 7.35 percent to 36.5 cents on the dollar in a 9:50 a.m. trade before the hearing began, according to Trace, the bond price reporting system of the Financial Industry Regulatory Authority.
“This agreement is a seminal moment for Ally,” Chief Executive Officer Michael A. Carpenter said in a statement. “We are pleased to have reached a consensual and comprehensive agreement that enables the company to put the issues related to the mortgage industry behind us.”
The settlement comes before a court-ordered report into the companies’ pre-bankruptcy relationship was to be made public.
The report, by former U.S. Bankruptcy Judge Arthur J. Gonzalez, examines allegations that Ally exerted so much influence over ResCap that the auto lender can be forced to pay its unit’s unsecured debts, which creditors claim may be as high as $25 billion.
Ally, ResCap and a committee representing the unsecured creditors announced the deal in an unannounced bankruptcy court hearing yesterday. Glenn had agreed to keep the report sealed while ResCap, Ally and the creditor committee completed their deal.
Terms of the agreement weren’t announced. Ally has previously proposed paying $750 million to settle claims that creditors say are worth billions of dollars.
The settlement doesn’t resolve claims against Ally that are not related to ResCap’s bankruptcy, including those brought by the Federal Housing Finance Agency and the Federal Deposit Insurance Corp., as receiver for certain failed banks, Ally said.
ResCap, based in New York, filed for bankruptcy last year, partly to help it resolve lawsuits brought by purchasers of mortgage bonds backed by home loans. The investors claimed the bonds lost value because many of the loans were bad. Such losses account for much of the $25 billion in unsecured debt that the creditors committee claims ResCap owes.
The case is In re Residential Capital LLC, 12-bk-12020, U.S. Bankruptcy Court, Southern District of New York (Manhattan).